Vanguard Gives "Hot" Fund a Chance to Cool Off

According to the announcement, the $742 million Vanguard Capital Value Fund (ticker: VCVLX) has been closed to new shareholder accounts, effective immediately.  

The fund is Vanguard’s top-performing fund in 2009 ⁽¹⁾ , with a total return of 68.5% through the first nine months of the year (compared with the 21.6% return of the broad U.S. stock market, according to Vanguard).   The firm notes that assets in the fund have more than tripled since the end of February “as a result of market appreciation and strong cash inflows.”

Vanguard said that the Capital Value Fund will not accept new accounts from retail shareholders, financial advisors, institutions, or retirement plan sponsors. Existing shareholders, including participants in defined contribution plans that already include the fund as an option, may continue to invest in it.

Two Purposes

“Despite our efforts – at both a company and an industry level – to educate investors about the perils of performance-chasing, we continue to be concerned about this behavior,” said Vanguard CEO Bill McNabb. “Closing the fund for a cooling-off period serves two purposes. First, it protects existing shareholders from higher transaction costs that can result from short-term-oriented investors moving in and out of the fund. Second, it protects prospective investors from themselves, as high-performing funds will almost certainly drop off at some point.”

However, Vanguard said that the “sizable influx” of cash into the Capital Value Fund this year has not affected the ability of the advisor, Wellington Management Company LLP, to implement its investment strategy. Wellington Management has advised the fund since its inception in 2001.

Vanguard employed similar cooling-off periods for its High-Yield Corporate Fund in 2003 and its Health Care Fund in 1999, according to the firm. The funds reopened after six months and ten months, respectively, as investor interest subsided and cash flows moderated.

⁽¹⁾ Vanguard Capital Value Fund ranked first out of Vanguard’s complete lineup of more than 160 funds for the year-to-date period ended September 30, 2009, based on annualized returns (source: Vanguard).